State Reactions and their Power over Association Health Plans

A Multiple Employer Welfare Arrangement (“MEWA”) requires participation by two or more employers, who are not part of the same control group of trades or businesses, that seek to offer health coverage to their employees. A MEWA can offer health coverage through either (1) a single ERISA-covered plan (“Category 1 MEWA”), or (2) an arrangement that includes multiple ERISA-covered plans, that are sponsored by unrelated employer members who participate in the arrangement (“Category 2 MEWA”). The final rules released by the Department of Labor (“DOL”) on June 19th expand Association Health Plans (“AHPs”), which are Category 1 MEWAs, by modifying the definition of “employer” under the Employee Retirement Income Security Act (“ERISA”). This modification allows employees (as well as working owners) to band together more broadly to promote the administration of AHPs. These new rules were not intended to affect the existing rules on AHPs, but to provide an additional category of eligible groups and individuals that could form an AHP.

AHP Categories

The final rules essentially created two categories of AHPs:

1. The Old Rules/Pre-Rules: AHPs following the pre-rule guidance

Existing AHPs and newly formed AHPs that meet the pre-rule guidance. The pre-rule guidance required that in order for a group or association of employers to be “bona fide” they must meet the “commonality of interest” requirements, which are met when the employer members are in the same industry, trade or profession, and must be located in the same geographic location. The employer members must also have control of the benefit arrangement. AHPs under the pre-rule guidance do not include working owners or self-employed individuals.

2. The Final Rules: AHPs following the new and final rules

The final rules expand the “commonality of interest” requirements in order to be “bona-fide,” and therefore AHPs under the final rules can either be:

(1) In the same trade, industry, or profession, but not limited by geography; or

(2) Unrelated, but confined to the same state or metro area.

In addition, to form an AHP under the final rules the following must be present:

  • At least one substantial business purpose that is unrelated to the offering of health coverage;
  • A formal organizational structure;
  • Control must be retained in the employer members;
  • Participants in the plan meet the definition of eligible participant, as outlined in the rules;
  • A health insurance issuer is not sponsoring the AHP; and
  • Compliance with HIPAA’s nondiscrimination rules (i.e., discrimination on the basis of a health factor), but AHPs may vary premiums and rate experience based on bona fide employment based classifications.

Under the final rules, an employer member who is considered a small employer would be able to avoid the small group market rules by joining an AHP that would constitute as a large employer or by joining a self-funded AHP. For example, those small employers would not be required to cover EHBs, which is a requirement in the small group market. This creates more opportunity for small employers to be able to offer large group market health coverage to their employees.

Additionally, the new rules apply to working owners, including those who are self-employed or who do not have employees. The final rules provide specific requirements for working owners.

The Final Rules: AHPs and the States

The AHPs following the final rules will be regulated at the federal and state level. Most notably, the final rules did not create a class exemption for self-funded AHPs, so they are subjected to ERISA’s MEWA preemption provisions. As a result, all AHPs under the final rules are MEWAs meaning they must comply with federal and state laws, such as state MEWA statutes. The DOL’s intention here was to protect consumers from potential fraud or abuse with this expanded rule. Therefore, states retain the authority to adopt certain benefit standards for these AHPs. The final rules utilize Pennsylvania as an example. Pennsylvania requires policies issued in the large group market to cover inpatient and outpatient services for mental health and substance use disorder benefits, and where applicable, this will apply to fully-insured AHPs and directly to self-funded AHPs in that state.

The states that are proponents of these final rules, regardless of having the power to regulate these AHPs, believe that small employers now have the ability to combat the rising cost of healthcare by expanding affordable healthcare options for small employers and their employees. For example, Oklahoma’s Insurance Commissioner John D. Doak supports these final rules because he sees this as moving away from Obamacare and providing more options for affordable healthcare outside of the individual and small group markets. Oklahoma is a state that has made prior strides to expand the use of AHPs via a bill that was passed in 2012.

By contrast, some states remain opponents of these new rules because they believe it creates adverse selection. Their argument is that healthy individuals would join AHPs as a cheaper option, because they do not have to cover certain benefits such as EHBs, while unhealthier individuals would join the individual and small group markets for more “robust coverage.” As a result, the more people that move from the individual and small group markets in order to join AHPs, will cause an increase in premiums for those markets making it less affordable for unhealthy individuals who stay on them. For example, Washington State’s Insurance Commissioner Mike Kreidler believes it will create adverse selection and unfair consequences for the sick. He also believes it will weaken the small employer markets because prior to these new rules AHPs were only available to large employers. Consequently, the final AHP rules used Washington State as an example when agreeing with the potential result of adverse selection. The rules note that Washington State experience rates nearly all of the AHPs in that state, but under the final rules, newly formed AHPs in Washington State will not be able to adjust prices based on health factors, but may only do so based on bona fide employment based classifications.

Other state opponents to the final AHP rules include New York and Massachusetts, who will sue the Trump Administration for the expansion of these plans that do not meet Obamacare’s requirements. New York Attorney General Barbara Underwood and Massachusetts Attorney General Maura Healey argue that the new rules are unlawful as they will create deception, fraud and mismanagement. They also both seek to uphold the Affordable Care Act’s (“ACA”) consumer protections and argue that the new rules are inconsistent with the ACA as well as ERISA. The reality is that even with these lawsuits the regulations will go forward because an injunction would have to occur before the final rules become effective on August 20th, which is unlikely. Thereafter, the rules indicate that there will be staggering effective dates as follows: “The final rule allows fully insured plans to begin operating under the new rule on September 1, 2018. Existing self-funded AHPs can begin operating under the new rule on January 1, 2019, and new self-funded AHPs can begin on April 1, 2019.”

As noted above, there is a divide among states regarding whether the final AHP rules will provide stability in the marketplace. As such, it remains to be seen whether states will modify their MEWA laws because of their reactions to the final rules. We can assume that supporters for the final AHP rules may minimize their regulations on MEWAs, while opponents of the rules may start to expand and put forth stricter MEWA statutes. It will be interesting to see how these new AHPs will operate in certain states and especially how they may operate across state lines.


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